To all - Barrons article about Iridium common still not $0 (not even close !), and also some boring stuff about Loral's
Satelites Mexicanos investment.
DECEMBER 13, 1999
Chat-Room Investors Still Have Hopes for
Iridium, So Why Do the Bears Call Them
Iridiots?
By Jacqueline Doherty
If the markets are supposed to be efficient, then why are shares of Iridium World
Communications still trading north of $3? The satellite company is mired in
bankruptcy. It has more than $4 billion of debt and its junior bonds are trading
around $5.
Oh, and by the way, Thursday after the market's close, the company came out
and practically said its shares are worth bupkes. In a press release Iridium wrote
that recent trading in the stock "does not reflect the reality of its financial
situation." And, it went on to add, "it is highly unlikely that reorganization will
result in value remaining from the bankruptcy estate for holders of publicly traded
equity."
We know there's a bit of legalese thrown in there. But that's probably the clearest
signal you're ever going to get from a company that its stock is worth nothing.
Back in April, we pointed out that the bonds and stock were trading in different
orbits. At the time, the company hadn't defaulted on its debt, but its bonds were
changing hands at 50 and its stock was still around 14. Even in July, when the
company announced that it would not make its interest payment, the bonds fell to
about 18 and the stock fell to only 6.
Since then the company has filed for bankruptcy and it teeters between getting an
equity infusion that may keep it operating or being forced to liquidate. Yet the
stock traded as high as 5 1/8 Friday and ended around 3 1/2 in the pink sheets. So
why is it trading so high? In part, because some investors are buying the shares to
cover short positions. Indeed, most stocks of bankrupt companies never fall
absolutely to zero. They usually trade at a few cents on the dollar. But that's still
no excuse for Iridium's stock to trade so high.
A more likely reason can probably be found in the Internet chat rooms. There are
still a handful of investors who just don't get it. They remain hopeful that if
Motorola or Craig McCaw put new cash into the company, they'd leave Iridium's
debt and equity outstanding. They don't seem to understand that McCaw wouldn't
touch the company without wiping out as much debt, and therefore equity, as
possible.
But in the world of chat, not everyone sees things this way, particularly the
hard-core "Iridiots," as they are called by the chat-room bears.
One of our favorites came Friday from someone signed in as
"UnabashedlyPositive" on Yahoo's chat pages: "Absolutely nuts, but I am still in.
Last night when I saw the [press release] I had an incredible anxiety rush, but
decided that the time for that had passed and I was going to remain committed. I
could get out here with half of my position and lose a little, but for some reason
I'm still encouraged by the price in the face of the announcement."
Conspiracy theories also run rampant. One chatterer wondered whether the
creditors' lawyers could have influenced the wording of the press release. On
Thursday, another questioned whether the U.S. government would bail out
Iridium, the same way it helped Lockheed or Chrysler. Supporters couldn't seem
to believe Motorola would leave Iridium shareholders in the lurch. The best theory
had Iridium saying that its stock was "worthless" for its own legal protection.
"Note that they talked about the $4 billion in debt. What about the assets?"
questions one ever-hopeful person.
And then there is the momentum crowd. "For me and my trader friends, we don't
care about the company, tech, results, but only the wave," one message said.
"There is enough wave to make money . . . (we) don't make conclusions. It's not
our job."
Welcome to the world of investing at the turn of the century. Colorful, but not
necessarily rational.
Loral Space & Communications could have some problems, but not where you
might think. In the past, investors worried about its involvement with Globalstar.
Instead, they should have watched its Satelites Mexicanos investment.
Loral owns a 49% stake in the Mexican satellite company, which last week asked
creditors to loosen its bank-loan terms. The terms called for the company to have
EBITDA (earnings before interest, taxes, depreciation and amortization) of 1.5
times its interest expense at yearend, and it asked the banks to reduce that to 1.2.
A junk-bond pro noted that over the past three quarters Loral has done deals that
enabled SatMex to meet its covenants. Without these deals, the company would
have needed waivers much sooner.
In March, Loral purchased $30.3 million of SatMex preferred and Loral's partner
in SatMex, Principia, purchased $1.6 million. The preferred pays dividends in
SatMex common. SatMex used the cash to pay off $35 million of debt, thereby
lowering its interest expense.
In June a Loral unit entered a longterm lease for two SatMex transponders. The
lease payments were recognized up front, boosting SatMex's second-quarter
revenues by $17 million to $42 million. It also added $7.5 million to EBITDA. In
September, Loral leased an additional transponder for $8.5 million. That brought
SatMex's third-quarter revenues up to $35.5 million. Likewise, $3.75 million was
added to EBITDA.
Without these deals, second-and-third-quarter revenues would have been flat to
down slightly compared with year-ago periods. And without the boost to its
EBITDA, the company would have violated its covenants, confirms a Loral
spokesman, but he adds, "If the lease had not gone through, Loral and Principia
would have stepped in with additional capital," preventing such a violation.
The transponder sales are clearly noted in both SatMex's and Loral's financial
reports. However, the impact on SatMex's bank-debt covenants is not enumerated
in the second-quarter report. It's only in the third quarter that SatMex mentions
that its cash flow may not be adequate to maintain certain financial ratios in its
debt agreements.
It's also interesting to note that the summer would have been a bad time for
SatMex to be in breach of its covenants. For in August, Globalstar was lining up a
$500 million bank facility, which Loral had to guarantee.
The Loral spokesman said there is no connection between the events at the two
companies. And he maintains that Loral and Principia's commitment to SatMex
remains constant: "SatMex is a growing, healthy business. If there's a problem
renegotiating [the bank debt], our commitment still stands. We'd like to explore
other options, though." Like asking the banks for looser requirements first.
Meanwhile, SatMex has $320 million of senior subordinated bonds outstanding,
which are quoted in the low 70s area. Bond investors obviously aren't overly
confident that the situation will work itself out.
E-mail: jacqueline.doherty@barrons.com
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